Danford Products has dividends today, D0, of $2 per share, an expected growth rate of 9 percent
Question:
Danford Products has dividends today, D0, of $2 per share, an expected growth rate of 9 percent per year to infinity, a beta of 1.40, kM = 13%, and kRF = 8%.
a. What is the required rate of return?
b. What is the current market price of Danford's common stock?
c. Danford is contemplating the divestiture of an unprofitable but stable revenue-producing division. The effect will be to increase the growth rate in cash dividends to 11 percent, and also increase beta to 1.60. What will be the new market value?
d. Instead of (c), Danford could merge with another firm that is a steady cash producer but is less risky. The effect would be to lower beta to 1.20 and reduce the growth rate in dividends to 8 percent. What would be the market value in that case?
e. Instead of either (c) or (d), a new, aggressive management could be brought in. Beta would go to 2.00, and the growth rate in dividends would be 13 percent. Now what would be the stock price?
f. Is Danford better off staying where it is, or moving to one of the plans outlined in (c), (d), or (e)? Which plan should the firm choose? Why is this the best plan?
Financial management theory and practice
ISBN: 978-1439078099
13th edition
Authors: Eugene F. Brigham and Michael C. Ehrhardt